Since 1982, the poorest countries of the world have struggled under an impossibly large debt burden, with enormous human costs. For less than is currently spent on debt payments, it would be possible over the next four years to make social investments which would save the lives of 21 million African children (Oxfam International). However, the current system ensures that the poorest simply get further behind in debt repayment and continue to loose ground in economic and social development. A spark of hope that now exists for a comprehensive debt solution must be fanned into flame by popular support, so that World Bank and IMF Finance Ministers make the necessary, bold decisions to turn around this destructive cycle.
The total debt of the world's 31 poorest countries was nearly $210 billion in 1994, 4 times greater than in 1980. While the amount owed to the multilateral agencies (the World Bank, IMF, and major and minor regional development banks) is about 22% of that, nearly 50% of the debt payments of the severely indebted low-income countries (SILICs) goes to these multilaterals (The SILICs can only pay about half the debt payments they owe each year, and thus keep paying interest, not principal).
In addition to the multilateral debt mentioned above, about 60% of SILICs' debt is owed to donor governments (bilateral debt); about two-thirds of that is owed to the US, Western Europe, and Japan; the other third to the Former Soviet Union or the Arab States. The reason for the discrepancy between the low proportion of debt to the multilaterals and the high amount of debt payments paid each year to the multilaterals is their "preferred creditor" status. They provide no debt relief and must be paid on time and in full. If they are not, all other credit to the borrowing government stops.
The SILICs are only able to remain current on their multilateral debts because they do not pay their other creditors. While they receive additional foreign assistance, it gets recycled to the multilaterals, or they use concessional loans from one multilateral to pay the debt of another or to pay off earlier debts to the same creditor. In short, a shell game operates so SILICs appear current in their multilateral debt payments — and can keep borrowing, with no real hope in sight.
The shell game's economic costs to SILICs are great. Because of profound insecurity about their future, they cannot attract foreign investment nor retain domestic investment. Government revenue services the debt instead of being invested in social and economic programmes benefiting their citizens. Limited government talent is wasted on short-term rescheduling instead of working on long-term growth projects. Oxfam estimates there were 8,000 debt rescheduling meetings between 1982 and 1990.
One in five Ugandan children does not reach its fifth birthday due to preventable diseases, yet only $3 per person is spent on health, compared to $17 on debt repayment.
Between 1990 and 1993, the Government of Zambia spent $37 million on primary school education. Over the same period, it spent $1.3 billion on debt repayments. Repayments to the IMF alone were equivalent to ten times government spending on primary education.
In Tanzania, spending on external debt is double the level of spending on water provision. Yet more than 14 million people lack access to safe water, exposing them to the threat of water-borne diseases, which are the main causes of premature death and disability.
In Honduras, total public spending on debt represented more than spending on health and education. This is in a country where over half of the population lives in abject poverty ("Multilateral Debt: The Human costs" Oxfam International Paper, Feb. 1996, p. 1).
The Catholic Church, in its many statements on debt, is one of the few institutions to recognise that both lender and borrower are responsible for the present debt morass. The Church also has sought to remind the parties involved that there must be limits on what can be demanded of debtors in terms of the suffering debt repayment causes (Debtor prisons for individuals were abolished in the last century, but extreme punishment for entire countries still exists).
While current heads of state may have inherited the mistakes of earlier regimes (such as in Uganda and Brazil), in most cases debtor governments bear a large share of responsibility through boondoggles, corruption, military budgets, and prestige items. One prime example is the one teaching hospital in Zambia that absorbs a full third of the national health budget. The creditors for their part have not been cautious about lending to foolish projects or shameless governors. Because money saved by any projected debt relief could go to more foolishness, there must be provisions that any such relief will be targeted for basic health and education.
A TIME OF HOPE
While the situation in the poorest of countries is desperate, this is a time of considerable hope for resolving not only multilateral debt, but also of providing an exit strategy for these countries from their total debt burden. Beginning at the fall Annual Meetings of the World Bank and the IMF in 1994, the Bank and Fund staff were told to study this debt crisis. This was a critical breakthrough: given the preferred creditor status of these institutions, it had been taboo even to suggest there was such a problem. However, the initial studies were rejected as based on improbably optimistic assumptions.
Then, the G-7 group (the world's richest countries) at the end of June 1995 boldly insisted that the Bank and the Fund must find ways to reduce these outstanding debts. Just before the Annual Meetings of the Bank and the Fund in 1995, a draft Bank staff paper was leaked to the press. The paper acknowledged the extent of the problem, argued for a comprehensive debt solution to stop recycling of commercial, bilateral, and multilateral — and thus stop the shell game, and proposed creative ways to reduce the debt burden of the poorest countries using Bank resources. This was a great step forward.
However, the momentum has slowed for three reasons. First, the leak both politically embarrassed and weakened new Bank President Jim Wolfensohn's support for the issue, since many of the member governments knew nothing about the pathbreaking paper's existence prior to the leak. Second, the U.S. Congress failed to appropriate funds to pay its full commitment to the tenth International Development Association (IDA) replenishment (for loans to poorest countries). This not only stalled future IDA negotiations, but also weakened U.S. financial leadership and support for multilateral debt relief.
The third brake on the momentum developed shortly after the 1995 annual World Bank and IMF Meetings, where another study and recommendations were commissioned on solving the debt problem. But the IMF, with the collusion of many finance ministries and central banks, is showing reluctance to admit a real problem for the poorest countries. (Should there be a problem, of course, it would not be the Fund's problem — it is a monetary institution, not a development bank. Thus the Fund acts as the greatest Free Rider, wanting all other creditors to reduce debts, so it can be paid in full).
Meanwhile, many non-governmental organisations have been working to ensure that member governments of the Bank and Fund provide a debt exit strategy for the poorest countries and avert further human tragedies. In order to do so, they have developed a set of criteria to be included in any official debt proposal:
1. Debt stock (principal), not only debt service, must be reduced substantially within a short time period, such as by the year 2,000.
2. The relief must be sufficient so the poorest countries will be able to pay the remainder without harm to their people, environment, or to present and future economic possibili ties.
3. To end the shell game, there must be a comprehensive multilateral debt reduction plan including all the multilateral creditors (the World Bank, the IMF, and the relevant regional development bank), improved terms from bilateral creditors (both the OECD and non-OECD countries), and any commercial creditors.
4. Additional money, not money from IDA or collected by recycling other overseas development assistance (ODA) funds, should finance debt reduction. The majority of the additional money must come from multilaterals — bilateral and commercial creditors have already covered much of the debts owed them.
Funds can come from a variety of sources, such as the Bank's future net profits, and by reducing present loan loss reserves, by committing less future profits to this category (from the Bank's and Fund's currency adjustment funds, as well as from sale of IMF gold or a new IMF Special Drawing Rights allocation). No proposal can require bilateral contributions — this would enable an anti-foreign aid Congress to veto the proposal.
5. The eligibility for determining which countries qualify for debt reduction must incorporate the country's social needs, its general liquidity, its balance of payment situation, as well as the standard debt-to-export ratios. In addition, countries should be evaluated in terms of their responsible economic behaviour, which is not to be confused with adherence to the Bank and Fund's orthodox economic adjustment programmes, and, most important, in terms of their record of commitment to poverty reduction.
ACTION FOR ECONOMIC JUSTICE
The issue of multilateral debt reduction has generated considerable public response around the world. Many people have become educated to the issue since the debt crisis erupted in 1982. Now we have a moment of hope when there is world-wide acknowledgement of the severity of the problem and the political will to take significant action. In the Washington area alone there are two coalitions of NGOs working on the issue: the Religious Working Group on the World Bank and the IMF as well as a secular coalition working on MDB debt.
The Religious Working Group developed educational materials for Lent, with two actions: 1) an Economic Way of the Cross, with suggestions for a public pilgrimage, praying at institutions tied to the globalised economy that benefits the few and impoverishes many; and 2) letter writing on the MDB debt. The U.S. Catholic Conference, through its monthly mailing and annual convention, has urged diocesan Justice and Peace Co-ordinators to encourage letter writing on the MDB debt issue. These U.S. Church actions are taken in collaboration with the Catholic development agencies of Europe, Canada and Australia, and with Caritas Internationalis, the umbrella organisation of over 150 national Catholic Charities.
In addition, A Bread for the World Action Alert calls for similar supporting letters. MDB debt is the top action priority for the 9 Oxfam national organisations (Oxfam International's Position Paper "Multilateral Debt: The Human Costs" is an excellent tool for gaining a deeper understanding of the issue). Many of these groups are also co-ordinating direct lobby visits with countries' Finance Ministers preparing for the April Bank and Fund Meeting, as well as with the corresponding Washington-based Executive Directors at the World Bank and the IMF.
However, the advocacy efforts of all groups and all individuals committed to social justice are necessary to change the face of poverty in the world today by working for comprehensive debt reduction. Such debt relief will offer new hope for human development in the world's poorest nations and create new hope for the entire world community.
Ref. Center Focus,
Issue n. 131, March/April 1996.
Issue n. 131, March/April 1996.